IRAP is a funny little Italian tax which is applied to businesses, except nobody in Italy seems to know which businesses should be liable for it. In October 2009, Italian Prime Minister, Silvio Berlusconi, announced that this tax is to be phased gradually out.

This regional tax (IR = Imposta Regionale) should, in theory, only be applied to businesses with a structure.  ‘Structure’ in this sense seems to mean a business which has employees.

I know of self-employed people who do not pay this tax because they have no employees, although the legality of not paying has not yet been fully proven in the Italian courts despite their having been a few cases on this matter.

Someone I know has recently opted to not pay this tax and acted upon the advice of a tax specialist who does not pay it.  My tax accountant, on the other hand, is taking a cautious approach to the payment of this tax and does not think it is a good idea to stop paying it because no definitive decison has yet been reached.  Apparently, the Italian tax authorities do not really know if this tax can be legitimately applied to one-person businesses.   Yes, it’s all a bit confusing.

Me?  I’m umming and aahing over the matter, which is why I’m posting this.  What I don’t want to do is to stop paying and then find myself with a retrospective tax bill, plus interest.  Then again, I’m not too happy about paying a tax which many think I should not be liable for.  Difficult situation.   Then again, this is Italy, and it could take years before any firm decision is reached, and even if it is, any change in legislation may not be retrospective.  Yes, I’m in a quandary.

UPDATE: 28 October 2009

After facing a revolt from Italy’s finance minister Giulio Tremonti, Berlusconi’s government seems to be revising its intentions to completely abolish the IRAP tax.  Instead this may be lowered, applied selectively  or certain companies may be exempted.  Just what will happen is not yet clear, although the chances of the IRAP tax being abolished appear to be reducing with every moment which passes.

Finance minister Tremonti was not all happy with the decision taken by Berlusconi to eliminate the IRAP tax.  This is  because Tremonti does not believe the Italian government can afford to lose the income it generates.  He may have a point in that the level ofItaly’s public debt in continues to increase.

Another update will appear when the IRAP situation becomes clearer.

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–Update end.

UPDATE: 22 October 2009

Silvio Berlusconi announced that the IRAP tax is to be abolished.  Not a bad idea, as its implementation has been complicated and it is likely that the hot air expended in discussing who should actually pay has probably led to a huge reduction in the level of income generated by this tax .  If administration costs exceed tax income, then the tax is not really worth collecting, or is too low.

My quandary as to whether to bother paying this tax was resolved, and I stopped paying IRAP on the advice of my accountant a while ago, as, I imagine, did many others.

The date when this tax will cease to exist is yet to be decided, although it was announced today that the IRAP tax would be lowered gradually until it ceases to exist.

–Update end.

Fewer taxes are always welcome, as the businessman side of Berlusconi well knows. Indeed, it was Berlusconi listening to small business which led to the decision to eliminate this pesky little tax.  Good stuff Silvio! – Well, the intention was there, but, it seems, the means were not, as the 28 October update above indicates.

Lower taxes can, paradoxically lead to higher tax income for governments, in that people will spend more, causing business profits to increase, which means, in turn, that tax contributions from businesses will increase – in theory at least.

A case of less is more, perhaps?

It would be great if Italy introduced a law to oblige companies to settle invoices within 30 days of receipt.  This in itself would help many companies in Italy, and may even be better than cutting taxes.   Prompt payment means that companies have money to pay taxes, and to keep employees in work. Late payments increase the risk of bankruptcy and unemployment.